Personal Taxes and Corporate Cash Holdings

56 Pages Posted: 25 Mar 2020 Last revised: 22 Oct 2021

See all articles by Jens Dick-Nielsen

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance

Kristian R. Miltersen

Copenhagen Business School

Ramona Westermann

Copenhagen Business School

Date Written: February 28, 2020

Abstract

Dividends are taxed at the personal level, but injecting funds into firms does not offer the symmetric tax benefit. Hence, there is a personal tax saving incentive to retain cash in the firm. We develop a corporate finance model of liquidity management, in which the firm’s liquidity policy trades off precaution and saved personal taxes against agency and corporate tax costs. The model implies that the tax saving motive is substantial and increasing with the dividend tax rate. Consistent with the model, we show empirically that, after the 2003 dividend tax cut, affected firms reduced their cash accumulation.

Keywords: Dividend Tax; Capital Gains Tax; Cash holdings; Agency Costs; Tax Savings Motive

JEL Classification: G32; G35; G38; H24; H32; K34

Suggested Citation

Dick-Nielsen, Jens and Miltersen, Kristian Risgaard and Westermann, Ramona, Personal Taxes and Corporate Cash Holdings (February 28, 2020). Available at SSRN: https://ssrn.com/abstract=3545765 or http://dx.doi.org/10.2139/ssrn.3545765

Jens Dick-Nielsen

Copenhagen Business School - Department of Finance ( email )

Solbjerg Plads 3
Frederiksberg, DK-2000
Denmark

Kristian Risgaard Miltersen

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

Ramona Westermann (Contact Author)

Copenhagen Business School ( email )

Solbjerg Plads 3
Frederiksberg C, DK - 2000
Denmark

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